Queer Year for Beer

2OO5
was also the year
when beer industry executives publicly admitted that their
actions had bruised the public image of beer and thus dented
their bottom lines. The mainstream media continues to hammer
the notion that beer is passe and that consumers are
tumbling over one another to get their hands on spirits and
wines. While it isn’t entirely clear whether the rise in
other categories is driven by a general increase in their
popularity or as a result of the dumbing down of beer’s
image, beer industry insiders are agreed on one thing:
things will be different in 2OO6.

The
WAKE UP CALL In one
of the most interesting and underappreciated stories of the
year, executives at Anheuser-Busch and SABMiller issued
public mea culpas for years of destructive advertising
campaigns. In the staid pages of the wall street journal,
the executives decried their prior actions and talked of new
plans for the future. While today may be a far cry from the
days when a brewery touted their beers with quaint,
wholesome print ads, it’s worth remembering that breweries
didn’t always advertise their products with scantily clad
women and crude jokes. Even the original “girls and humor”
campaigns quickly devolved into “bimbos and slapstick”, as
Tom Long, Miller’s chief marketing officer, noted in the
article. In a spiraling decline into disturbing
one-upsmanship, the big three breweries associated beer with
cat fights, flatulent horses and bikini-clad
twins.

While the ads
were often effective for the core base of young male
consumers, they also succeeded in tarnishing the public
perception of beer. As very little advertising focused on
the flavor of the products, such points of differentiation
were lost on consumers. The importance of hops and malts was
replaced with a relentless series of similar ads in poor
taste, each selling an interchangeable widget of a
product.

Whether the
result of such debasing ads was the defection of even young
drinkers to wine and spirits, it’s widely recognized that
public image of beer has a split lip and a pair of black
eyes. “People will tell you that beer is not sophisticated
enough, or stylish enough, to compete with wine and
spirits,” says Miller’s Long in the journal article. “Why do
they think that? Well, I believe it’s because we told them
to.”

Industry
insiders often cite the sophisticated images cultivated by
the spirits and wine industries as a source of their
increasing popularity. Peaking in 1995 at 61 percent of the
beverage alcohol market, beer’s share fell to 58 percent by
2OO4. Conversely, spirits increased a point and wine rose
two percent in the same timeframe. Baby boomers and women
have turned to wine and spirits in greater numbers as have a
larger contingent of young drinkers.

According to at
least one beer industry executive, the problem is easily
corrected by an abrupt reversal in the focus of the ad
campaigns. “We’ve marketed our way into this problem,” Long
told the wall street journal, “And we can market ourselves
out of it.”

It’s unclear at
this point how much of this is pure public relations lip
service on the part of SABMiller. After federal and industry
regulators heard cross-complaints regarding advertising by
both companies early in 2OO5, the ad war temporarily cooled
down. But just a few weeks after Long made his conciliatory
comments to the wall street journal, SABMiller fired another
salvo in the battle. In a recent series of ads, Miller
claimed that Anheuser-Busch had altered the flavor profile
of Bud Light to make it more bitter and carbonated. A-B
immediately denied those claims and took their complaints
directly to the cable networks showing the ads. After
reviewing A-B’s challenge to Miller’s claims, many of the
networks pulled the ads and asked Miller to provide
substantiation of the claims. Miller subsequently dropped
the claims and went another direction with a reformulated
ad.

For its part,
Anheuser-Busch seems to be taking the issue of beer’s
bruised image seriously. Working through the Beer Institute,
A-B is considering several ad concepts for the promotion of
beer. The campaign, akin to the dairy industry’s popular
“Got Milk?” ads, will promote beer as a quality beverage and
not as a vehicle for cheap laughs. While it has taken some
hits at the expense of Miller’s ads, A-B is publicly
acknowledging that future ad spending will be less focused
on television. The brewery is redirecting ad spending away
from such staple events as the Super Bowl and is instead
focusing more on cable and the internet. Anheuser-Busch also
appears to be honoring its public truce with
Miller.

As an industry
referee, the Beer Institute has long promoted guidelines for
the advertising of beer in America. Starting January 1, the
Beer Institute added an independent, third-party complaint
review process to review and consider violations of its
Advertising and Marketing Code. Three basic principles make
up the heart of the code. “First, beer advertising should
not suggest directly or indirectly that any of the laws
applicable to the sale and consumption of beer should not be
complied with. Second, brewers should adhere to standards of
candor and good taste applicable to all commercial
advertising. Third, brewers are responsible corporate
citizens, sensitive to the problems of the society in which
they exist, and their advertising should reflect that fact.
Brewers strongly oppose abuse or inappropriate consumption
of their products.”

DETHRONING
the KING Anheuser-Busch is not satisfied with simply
trying to maintain its traction in the domestic beer market.
A-B’s chief executive, Patrick Stokes, recently stated his
vision for the brewery’s future. “The company has a number
of initiatives in place to enhance beer volume growth,
including introduction of new products, led by Budweiser
Select, increased investments in domestic marketing, stepped
up on premise sales initiatives, new packaging, and tactical
price promotions.”

The brewery is
busy releasing a series of specialty seasonal draft beers to
fill out the portfolios of wholesalers. Following on the
heels of Jack’s Pumpkin Spice Ale, a spiced, cinnamon
scented beer, is the new release, Winter’s Bourbon Cask Ale.
Weighing in at 6 percent ABV, the beer is brewed with dark
roasted caramel malts and aged on toasted bourbon oak casks
with whole Madagascan vanilla beans. “Winter’s Bourbon Cask
Ale was carefully crafted to appeal to adults who are
looking for a new drinking experience this season,” said A-B
brewmaster Florian Kuplent.

While it is too
early to tell whether A-B’s specialty releases will gain any
traction against craft beers, Anheuser-Busch is also
undertaking some intriguing efforts to blunt the progress
and success of craft breweries. You may be familiar with
A-B’s strategic business alliances and ownership interests
with Widmer Brothers Brewing, the Kona Brewing Company and
the Redhook Ale Brewery. In the four years following its
agreement with Kona, the little brewery’s sales have
tripled.

In seeing sales
of its flagship products decline and flagging sales and
earnings across the domestic board – one contributor to the
online investing journal, the Motley Fool, called it the
dethroning of the king of beers – Anheuser-Busch is
reportedly looking to form additional strategic
relationships or acquisitions with other craft breweries. In
the vein of “if you can’t beat ’em”, A-B is reportedly in
talks with several major craft brewing players. The earliest
reports leaked out of the Old Dominion Brewing Company in
Ashburn, Virginia. On an industry list of brewers in 2OO4,
Old Dominion was the nation’s 45th largest brewery and
produced 26,7OO barrels. According to general manager Terry
Fife on BeerAdvocate.com, A-B engaged the craft brewer in
mid-2OO5 in a dialogue regarding a possible equity ownership
and distribution agreement. Fife confirmed this was not the
first time A-B approached the brewery and that the company
was making similar overtures to at least a half-dozen other
craft breweries. The discussion included the possibility of
adding these regional craft beer powerhouses to A-B’s
distribution network.

A few weeks
later, word from Chicago added the Goose Island Brewing
Company to the list of possible craft beer partners. In late
December 2OO5, Goose Island president and founder John Hall
confirmed to the chicago tribune that his company was in
talks with Anheuser-Busch regarding a possible distribution
agreement. The craft brewer, which produces around 5O,OOO
barrels annually, is one of the biggest craft players in the
Midwest. Hall refused to provide the tribune with any
additional details regarding the negotiations.

With rumors
confirmed for two breweries, industry insiders are left to
guess at the identities of the other targeted craft brewers.
Anheuser-Busch would likely seek craft breweries with proven
regional traction, well-identified and respected brands,
strong growth potential, and the demonstrated ability to
appeal to cross-over drinkers. Possible targets could
include the Brooklyn Brewery, Great Lakes Brewing Company,
Long Trail Brewing Company, and the Abita Brewing
Company.

With rumors
swirling, some craft breweries have felt compelled to deny
their involvement with A-B. Rich Doyle, the chief executive
officer of the Harpoon Brewery, denied that his brewery was
one of the targets. While denying involvement on an industry
beer website, Doyle considered both sides of an alliance
with Anheuser-Busch. “A distribution alliance can be a big
blessing or a huge curse” he wrote. “If you lose control of
your distribution channels to an indifferent or malevolent
‘partner’ you will have a tough time selling your beer. An
interested or benevolent partner of course can be
helpful.”

ASSESSING
the SITUATION While
A-B’s alliance efforts have raised eyebrows in the craft
beer industry, from a business vantage point, the moves
shouldn’t shock anyone. Facing the inevitable hurdles posed
by new product launches to the general public and the
considerable consumer skepticism of its attempts to court
craft beer drinkers, for Anheuser-Busch, strategic alliances
or equity ownership agreements make a lot of sense. While
craft breweries have flown beneath the industry radar for
much of their existence, cultivating local markets and
generating and exploiting geographic or flavor niches, they
are beginning to grow too large to remain in the shadows.
While their collective market share has stalled at just
above 3 percent, the craft beer industry continues to
generate solid growth in terms of volume, all while the big
three continue to lose traction. Profitability also makes
many craft brands the hidden gems of a wholesaler’s
portfolio, assuming roles that remain unmatched by products
from the larger breweries. Anheuser-Busch has seen little
success in its own forays into the craft market.

On the other
side, craft breweries will soon reach a sobering crossroads.
While some of these breweries celebrate their tenth,
fifteenth and even twentieth anniversaries, the beer
business is tougher than ever. Many craft breweries have hit
unexpected glass ceilings in their growth in home markets
and have retreated after failed attempts to expand their
distribution to new markets. After redoubling their efforts,
the regional craft beer powerhouses now sport solid
operations that manage their breweries like businesses.
While there is more room for growth, craft breweries
continue to have difficulty in terms of achieving full
share-of-mind of distributors. As the regional craft
breweries continue to grow, distribution will weigh more
heavily on their minds and business operations.

Old Dominion’s
Terry Fife confirmed the attractiveness of access to A-B’s
distribution network for a craft brewery. “Dominion would
have access to A-B distributorships, and A-B would have a
greater arsenal at their disposal in the Mid-Atlantic, if
not beyond,” he wrote. “Since distribution is a constant
concern for craft breweries, a partnership like this could
provide us with great peace of mind. Provided that Old
Dominion was able to continue making quality beers without
interference, this would ostensibly be a great situation for
both companies and consumers as well.”

It remains to be
seen whether any of the above-mentioned craft breweries will
eventually partner with Anheuser-Busch, either as part of a
distribution alliance or an equity share ownership
agreement, but it seems a likely scenario for some craft
breweries. The age of innocence is over. Craft breweries
have a tough, brutal road ahead for increased volume and
market share. It will take even more work than ever before.
For some breweries, whose owners have been fighting for ten
or even twenty years, an agreement with a larger brewery –
while for some may seem like a deal with the devil – may be
the right move at the right time.